An indirect rate budget for 2027 starts with projected revenue and adds projected direct costs and expenses. It then tests whether you have the people and resources to deliver the work. Calendar year contractors should build it in the fall. That leaves time to test it, revise it, and begin January with rates you understand and can defend.
The budget section of my book, Government Contract Accounting Made Easy, covers this process in detail. I use a hybrid approach with three parts: revenue, direct costs and expenses, and an analysis that ties the two together.
Why Build an Indirect Rate Budget in the Fall?
Fall is budget season for calendar year contractors because your 2027 rates depend on projected revenue and expenses, and gathering both takes time. A budget built now can be tested, revised, and defended before January arrives. But a budget rushed in December leaves little room to question the assumptions.
Where Does an Indirect Rate Budget Start?
It starts with revenue, because every expense decision depends on it. Begin with your backlog, the work already under contract. Then review outstanding proposals and apply honest win expectations to each one. Finally, consider drop-in work, the task orders and smaller additions that appear during the year and rarely show up on a forecast until they arrive. Contractors who leave drop-in work out of the picture also tend to understate both their revenue and the staff they will need.
How Do You Build the Expense Side of an Indirect Rate Budget?
Budget labor, fringe, overhead, and G&A using a combination of three methods: bottom up, extrapolation, and best guess.
Bottom-up works for costs you can know with confidence. You know your fixed expenses, such as rent and utilities. For insurance and software, get updated quotes instead of carrying last year’s figures forward, because renewals rarely come in at the same price.
Extrapolation suits accounts with a history. Look at the trends in your trial balance and project them forward. Finally, best guess covers whatever remains, where judgment is the only tool available. Write down your reasoning in those cases so you can explain it later.
Can You Staff and Equip the Work You Expect to Win?
The analysis step answers that question by marrying revenue and expenses. Look at the work you identified in the revenue portion and ask whether you have enough people and resources to execute it. Do you need to hire? Do you need to rent a facility or buy equipment? Each answer changes the expense side of your indirect rate budget, and those changes flow through to your rates.
Hiring ahead of work you expect to win deserves particular attention, because the cost arrives before the direct labor does. We explain that timing gap in what growth does to your indirect rates. You may also find the opposite: that you are carrying capacity the projected work will not use. Learning either of those things in October is far better than learning it in the spring.
Why Do Budgeted Rates Matter All Year?
Your budget shapes the rates you propose and bill throughout the year. Under FAR 52.216-7, the billing rates used until final rates are established should reflect your anticipated final rates. Because of this, a budget built from real revenue and expense projections gives you a defensible starting point. Once it is complete, what-if analysis for indirect rates lets you test decisions against that baseline as the year unfolds.
How Does Rate Studio Help You Build an Indirect Rate Budget?
You have probably been doing this in Excel for years, and there is a better way. We built Rate Studio to walk you through this process methodically and document everything along the way. It calculates your rates and produces reports you can readily provide to DCAA or other auditors and reviewers. It works alongside your accounting system by modeling the year ahead from the actuals your system records.
The modules follow the same steps described above. The Revenue module uses the same structure covered earlier: backlog, outstanding proposals, and drop in work. In the Labor module, you build labor and fringe expenses by employee with detailed hours and rates. The totals flow through your rates automatically, so any change you make is recalculated for you.
Prior-year and current-year to-date trial balances help you identify trends and extrapolate expenses into your projections. You can make dollar or percentage adjustments. A notes column captures the reason for each change, which pays off when someone asks why a number moved.
Frequently Asked Questions
When should a contractor build its indirect rate budget?
Calendar year contractors should build it in the fall so the 2027 rates are tested and ready in January. Contractors on a different fiscal year can apply the same timing relative to the start of their year.
What should an indirect rate budget include?
It should include projected revenue from backlog, outstanding proposals, and drop in work. It also needs projected expenses for labor, fringe, overhead, and G&A, plus an analysis that tests whether you have the people, facilities, and equipment to deliver the work.
What is drop in work?
Drop in work is the task orders and smaller additions that arrive during the year and rarely show up on a forecast until they do. Including a reasoned estimate keeps both revenue and staffing from being understated.
What are the three ways to budget an expense?
Bottom-up builds from known costs, such as rent, utilities, and updated insurance and software quotes. Extrapolation projects trends from your trial balance history. Best guess covers whatever remains, and you should document your reasoning.
Do I need a budget if my accounting system already calculates rates?
Yes. Your accounting system calculates actual rates from recorded costs after the fact, while a budget projects the year ahead. That gives you defensible rates for proposals and billing before the actuals exist.
Start Your 2027 Indirect Rate Budget Today
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This post is part of the Beyond the Single Rate series. To learn more, schedule a conversation.
